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Retirees facing higher prices due to record high inflation may get some good news this week when the Social Security Administration announced a cost-of-living adjustment for 2023.
The benefits increase is scheduled to be announced Thursday along with new consumer price index data for September.
The League of Senior Citizens, a nonpartisan seniors group, estimated last month that the COLA could be 8.7% next year. That would make it the highest increase in decades, surpassing this year’s 5.9% annual cost-of-living adjustment, the largest in nearly 40 years.
“These are just estimates,” meaning the official change for 2023 could be higher or lower, said Mary Johnson, Social Security and Medicare policy analyst for the League of Senior Citizens.
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The group estimates how the COLA will shape each month as new CPI data is released.
Estimates from the League of Senior Citizens, based on June data, showed benefits would be 10.5% higher next year. However, the following month, the estimate dropped to 9.6% and 8.7% based on the most recent August data.
The estimates are based on a subset of CPI data for urban wage earners and clerical workers, known as the consumer price index, or CPI-W. The Social Security Administration uses this measure to determine the COLA each year.
The annual COLA applies to both Social Security and Supplemental Security Income. The Social Security Administration determines the annual adjustment by calculating the percentage change in the CPI-W from the third quarter of the previous year to the third quarter of the current year.
According to Johnson, the decline in estimates in recent months does not necessarily coincide with a decline in inflation for seniors.
“Food prices are the first place older consumers will feel inflation, and those prices rose significantly in August,” Johnson said.
Beneficiaries will see larger checks in 2023
Beneficiaries are poised to see more of the 2023 COLA increase in their monthly benefit checks, according to Johnson.
The reason: Medicare Part B premiums are usually deducted directly from benefit checks because the standard monthly premium will decrease by $5.20 next year, from $170.10 in 2022 to $164.90.
“This means that beneficiaries will be able to keep almost all or most of the COLA increase,” Johnson said.
To be sure, some beneficiaries may also have deductions for taxes taken out of their monthly checks.
“Prior to the disruptions, people would actually see all of their COLAs in their Social Security check,” Johnson said.
As the Federal Reserve continues to raise interest rates, this may be reflected in September’s CPI data and consumer confidence.
On September 21, the Fed raised the target federal funds rate by 0.75 percentage points. But an earlier interest rate hike of the same magnitude that occurred in July is likely to have a bigger impact on September’s data, according to Johnson.
What could happen to benefits after 2023?
Future COLAs may not be as large as the larger increase expected in 2023.
If there is a recession, it could cause inflation to shift to deflation, where prices fall, Johnson said.
In the midst of the Great Recession, a 5.8% COLA was announced in 2008 and went into effect in 2009. However, in the following two years, the benefits were adjusted to 0%.
“If we go into a recession, we could face something like this,” Johnson said.
A higher COLA in 2023 would put additional pressure on Social Security’s trust funds, which face an estimated 13-year time horizon to pay full benefits, the Committee on a Responsible Federal Budget reported in June.
A larger COLA would add tens of billions of dollars to the program’s liabilities, Maya MacGuineas, chairwoman of the Committee for a Responsible Federal Budget, told CNBC.com at the time.
“It would cost the program enough money that it could bring the bankruptcy date a year sooner,” MacGuineas said.